8/31/2004 @ 3:00PM

Thanks, Linux

Is
Linus
Torvalds
Linus Torvalds
secretly working for
Microsoft
? That sounds crazy until you consider that lately, the free operating system he created, Linux, has been helping Microsoft close deals.

Consider the deal that Microsoft
snagged with the London borough of Newham, announced in early August. Looking to overhaul their computer systems, the Brits originally planned to dump Microsoft’s Windows and switch to open-source programs, including Linux. But when they commissioned a study to evaluate costs, they found it would be cheaper to stick with Windows. So they signed on for a 10-year deal.

“We think the savings following the Linux route would have been about half what they were when following the Microsoft route,” says Richard Steel, Newham’s director of information and communications technology.

Knocking the legs out from under Linux is one of the new paths Microsoft is following as it approaches its 30th anniversary next year. Growth is slowing in the businesses that drove its early years, and regulatory attacks on the bare-knuckled deal-making of its youth are forcing a more mature Microsoft to behave differently. But as its sell against Linux shows, Microsoft still packs plenty of punch.

How could “free” Linux cost more than Windows? First of all,
Red Hat
, the leading Linux distributor, now charges $799 to $2,499 for each server running Linux. That’s not for the software, mind you, but for “maintenance.” Semantics aside, you’re paying for Linux.

Add in the cost of retraining users and IT staff, rewriting applications to run on Linux, and the cost of paying separately for programs like application servers, Web servers and directories (which come bundled with Windows). You also may need to pay consultants to stitch the pieces together, and you might need to buy insurance to protect you against lawsuits over intellectual property rights. (One outfit hawks such policies for $150,000 year.)

Steel admits that Microsoft cut prices to meet the Linux threat. But more important, Steel says, is that Linux ended up proving the value of Microsoft’s products. Moreover, Steel notes that Linux lacks things that Windows offers, like the ability to run on tablet PCs–a feature that will let Newham’s civil servants tap in data from the field.

Which raises a few questions: First, how long will it take Linux to catch up with Windows in terms of features, device driver support and breadth of applications?

Torvalds’ Linux kernel (the core of the operating system) is 13 years old. Other parts of the operating system are even older. Even if Linux does catch up, will it matter? If the Linux camp simply manages to create an operating system that does roughly what Windows does for roughly the same price, what will be the point?

Think how Microsoft must love this. Rivals like
IBM
and
Novell
are pumping millions of dollars and mountains of brainpower into development of a commodity operating system–they are re-inventing the wheel.

Meanwhile, Microsoft is climbing “up the stack,” growing stronger in Web applications and business applications, using its server operating system as a launching pad to push into adjacent markets just as it used its PC operating system to take over the market for desktop applications.

Forrester Research says 56% of companies now cite Microsoft’s .NET technologies as their primary development platform, while 44% use a rival platform called Java 2 Enterprise Edition (J2EE) as their building blocks. That smaller portion is shared by
BEA Systems
, IBM,
Oracle
, and
Sun Microsystems
.

Microsofties say they were more worried about Linux a few years ago, when it was a truly free program, spreading on its own, from user to user, like a virus. Now that Linux costs real money, and is sold by buttoned-down blue suits from IBM and Novell, Microsoft feels more confident. Microsoft has beaten these guys, badly, in operating system wars before.

In Newham, Microsoft staved off an attack by IBM, which was pushing the borough to switch to Linux. In the end IBM didn’t even win Newham’s hardware business–the bid went to
Hewlett-Packard
.

For now, IBM and its Linux allies have more luck when they use Linux to attack each other rather than Microsoft. HP, IBM and Sun spent 20 years building a Unix market. Now they’re lobbing Linux grenades into each other’s camps, stealing Unix customers from each other. In the end this kamikaze warfare will destroy all the profit in this market, as fat-margin Unix boxes are replaced by low-margin Linux systems. Worldwide sales of Unix servers have already plunged from $26.5 billion in 2000 to $16.4 billion in 2003, according to market researcher IDC.

To be sure, Microsoft too is losing sales to Linux. By 2008, sales of Intel-based servers running Linux will approach $10 billion, versus $22 billion for Windows, IDC reckons. And, yes, as Newham proves, Linux is forcing Microsoft to slash prices and to work harder to keep customers.

But Microsoft likes fighting. “Microsoft does not move well unless there is a competitor to focus on,” says Robert Enderle, president of the Enderle Group, a market research firm. “Linux is making Microsoft vastly more capable.”

For years customers griped that Microsoft was gouging them. Now, thanks to IBM, Novell, and Red Hat, customers are learning what it is that Microsoft charges them for–upgrades, patches, research and development, indemnification, integration of disparate programs. Some, like the folks in Newham, are discovering that Microsoft isn’t ripping them off at all.

Says Enderle: “Linus Torvalds has probably been a bigger asset to Microsoft than
Bill
Gates
Bill Gates
, and I doubt he’ll even get the opportunity to spend the night in Bill’s house.”